Derivative Financial Instruments

9 Months Ended

Sep. 30, 2016

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

7. Derivative Financial Instruments

We are required to record derivatives on our Condensed Consolidated Statements of Financial Condition as assets and liabilities measured at their fair value.  The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting.

Our derivative financial instruments according to the type of hedge in which they are designated follows:

	September 30, 2016
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
No hedge designation
Rate-lock mortgage loan commitments	$	31,760		0.1	$	1,163
Mandatory commitments to sell mortgage loans		67,672		0.1		(283	)
Pay-fixed interest rate swap agreements		48,623		8.8		(2,009	)
Pay-variable interest rate swap agreements		48,623		8.8		2,009
Purchased options		3,119		4.8		216
Written options		3,119		4.8		(216	)
Total	$	202,916		4.4	$	880

	December 31, 2015
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
No hedge designation
Rate-lock mortgage loan commitments	$	20,581		0.1	$	550
Mandatory commitments to sell mortgage loans		46,320		0.1		69
Pay-fixed interest rate swap agreements		27,587		8.0		(497	)
Pay-variable interest rate swap agreements		27,587		8.0		497
Purchased options		2,098		5.7		122
Written options		2,098		5.7		(122	)
Total	$	126,271		3.7	$	619

Certain financial derivative instruments have not been designated as hedges. The fair value of these derivative financial instruments has been recorded on our Condensed Consolidated Statements of Financial Condition and is adjusted on an ongoing basis to reflect their then current fair value. The changes in fair value of derivative financial instruments not designated as hedges are recognized in our Condensed Consolidated Statements of Operations.

In the ordinary course of business, we enter into rate-lock mortgage loan commitments with customers (“Rate-Lock Commitments”).  These commitments expose us to interest rate risk.  We also enter into mandatory commitments to sell mortgage loans (“Mandatory Commitments”) to reduce the impact of price fluctuations of mortgage loans held for sale and Rate-Lock Commitments.  Mandatory Commitments help protect our loan sale profit margin from fluctuations in interest rates. The changes in the fair value of Rate-Lock Commitments and Mandatory Commitments are recognized currently as part of net gains on mortgage loans.  We obtain market prices on Mandatory Commitments and Rate-Lock Commitments.  Net gains on mortgage loans, as well as net income may be more volatile as a result of these derivative instruments, which are not designated as hedges.

During 2015, we began offering to our deposit customers an equity linked time deposit product (“Altitude CD”).  The Altitude CD is a time deposit that provides the customer a guaranteed return of principal at maturity plus a potential equity return (a written option), while we receive a like stream of funds based on the equity return (a purchased option).  The written and purchased options will generally move in opposite directions resulting in little or no net impact on our Condensed Consolidated Statements of Operations.  All of the written and purchased options in the table above relate to this Altitude CD product.

We have a program that allows commercial loan customers to lock in a fixed rate for a longer period of time than we would normally offer for interest rate risk reasons.  We will enter into a variable rate commercial loan and an interest rate swap agreement with a customer and then enter into an offsetting interest rate swap agreement with an unrelated party.  The interest rate swap agreement fair values will generally move in opposite directions resulting in little or no net impact on our Condensed Consolidated Statements of Operations.  All of the interest rate swap agreements in the table above relate to this program.

The following tables illustrate the impact that the derivative financial instruments discussed above have on individual line items in the Condensed Consolidated Statements of Financial Condition for the periods presented:

Fair Values of Derivative Instruments

	Asset Derivatives						Liability Derivatives
	September 30, 2016			December 31, 2015			September 30, 2016			December 31, 2015
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
	(In thousands)
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other assets	$	1,163	Other assets	$	550	Other liabilities	$	-	Other liabilities	$	-
Mandatory commitments to sell mortgage loans	Other assets		-	Other assets		69	Other liabilities		283	Other liabilities		-
Pay-fixed interest rate swap agreements	Other assets		-	Other assets		-	Other liabilities		2,009	Other liabilities		497
Pay-variable interest rate swap agreements	Other assets		2,009	Other assets		497	Other liabilities		-	Other liabilities		-
Purchased options	Other assets		216	Other assets		122	Other liabilities		-	Other liabilities		-
Written options	Other assets		-	Other assets		-	Other liabilities		216	Other liabilities		122
Total derivatives		$	3,388		$	1,238		$	2,508		$	619

The effect of derivative financial instruments on the Condensed Consolidated Statements of Operations follows:

		Gain (Loss) Recognized in Income
	Location of Gain (Loss)	Three Month Periods Ended September 30,						Nine Month Periods Ended September 30,
	Recognized in Income	2016			2015			2016			2015
		(In thousands)
No hedge designation
Rate-lock mortgage loan commitments	Net gains on mortgage loans	$	264		$	281		$	613		$	386
Mandatory commitments to sell mortgage loans	Net gains on mortgage loans		94			(745	)		(352	)		(225	)
Pay-fixed interest rate swap agreements	Interest income		196			(452	)		(1,512	)		(492	)
Pay-variable interest rate swap agreements	Interest income		(196	)		452			1,512			492
Purchased options	Interest expense		13			126			94			126
Written options	Interest expense		(13	)		(126	)		(94	)		(126	)
Total		$	358		$	(464	)	$	261		$	161